Steadfast Group Limited

Company Overview: Steadfast Group Limited (ASX: SDF) is in the business of the provision of services to Steadfast Network brokers, the distribution of insurance policies via insurance brokerages and underwriting agencies, and related services. The Group’s corporate structure includes equity investments in insurance intermediary entities (insurance broking and underwriting agencies), premium funders and complementary businesses. The Group distributes insurance and premium funding products primarily in Australia and New Zealand and is also expanding its footprint in the United Kingdom and Singapore.

SDF Details 

Broad Client Base and Increased Value Creation for Shareholders: Steadfast Group Limited (ASX: SDF) is in the business of the provision of services to Steadfast Network brokers, the distribution of insurance policies via insurance brokerages and underwriting agencies, and related services. As on 28 September 2020, the market capitalization of the company stood at ~$2.86 billion.As per the CEO, "during FY20, the company continued its year on year record growth since its August 2013 IPO, despite the impact from the COVID-19 pandemic." The company’s strong client base and network, coupled with focus on delivering quality service enabled it to report the result as per its pre-COVID guidance range.

During FY20, the company reported an increase of 15.5% in underlying earnings before interest, tax, and amortization (EBITA) to $223.5 million and an increase of 22.6% in underlying net profit after tax (NPAT) to $108.7 million. This was mainly due to the profitable growth via acquisitions and organic growth in the company’s Insurance Broking and Underwriting Agencies. During FY20, the company maintained its healthy working capital position and its gearing ratio. The reported underlying diluted EPS of 12.7 cents per share was up by 13.4% year over year. This allowed the Board to declare a final dividend of 6 cents per share, taking the total dividend for FY20 to 9.6 cents per share. The total FY20 dividend represents a payout ratio of 76%, in-line with its target range of 65% to 85% of underlying net profit after tax.

Despite the uncertainty in the economy due to the fallout of COVID-19 pandemic, and the subsequent government restrictions to manage the rapid spread, the company translated its earnings into cash flows, and converted 100% of its underlying NPATA into cash. This cash was employed to finance the continued growth in technology, further acquisitions, and payment of increased dividends to its shareholders. The company reported a healthy balance sheet with a corporate gearing ratio of 21.5% and an unutilized capacity of $181 million.

One of the key strategic goal for the company include ensuring value creation for shareholders as evident by its healthy return on invested capital over the long term. The company seems well-positioned to improve operational efficiency via a culture of excellence and talent pipeline, seeking opportunities to reduce operating costs and improving underlying margins.

Key Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Steadfast Group Limited. Challenger Managed Investments Ltd. is the largest shareholder in the company, with the percentage holding of 6.15%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Decent Management of Costs and Healthy Balance Sheet: During FY20, gross margin of the company witnessed an improvement over the previous year, and stood at 80.4%, up from 78.8% in FY19. This shows that the company is well-managing its costs and can convert its revenue into profit. In the same time span, EBITDA margin of the company stood at 19.1%, higher than the industry median of 10.8%, indicating better profitability. During FY20, Assets-Equity ratio of the company stood at 2.46x, lower than the industry median of 6.18x. This indicates that the business is financed with a more significant proportion of investor funding and a lesser proportion of debt, indicating a financially stable balance sheet.

Key Margins (Source: Refinitiv, Thomson Reuters)

Segment Performance: The Group’s corporate structure includes equity investments in insurance intermediary entities, premium funders, and complementary businesses. The company has three business streams focused on servicing general insurance clients, namely Steadfast Broker Network, Steadfast Underwriting Agencies and Complementary businesses. During FY20, Steadfast Network brokers’ gross written premium went up by 34.8% to $8.3 billion, and the number of Network Brokers increased from 375 to 458, mainly because of the IBNA transaction. Steadfast Insurance Broking revenue increased by 10.2% and saw a growth of 23.9% in underlying EBITA. This was driven by organic growth and acquisitions, along with a rise in premium by insurers. During FY20, Steadfast Underwriting Agencies outpaced with decent organic growth and benefitted from higher premium pricing by strategic partners. The business reported an increase of 13.1% in GWP to $1.3 billion and a growth of 14.7% in EBITA.

Growth in GWP in Underwriting Agencies (Source: Company Reports)

Key Risks: The company is exposed to a variety of risks, including the risks while capitalizing on opportunities to deliver long term value to stakeholders. These risks include changing technology and increasing data collection, changes in regulatory and increasing stakeholder scrutiny, capacity risk, the highly competitive landscape for human capital, and increasing cybersecurity risk.

Future Expectations and Guidance: Despite the global uncertainty in the market, the company has shown resilience and seems well positioned to tackle the challenges and benefit from the opportunities ahead. The company has provided guidance for FY21 and expects underlying EBITA to be in the range of $235 million to $245 million and underlying NPAT to be in between $115 million to $122 million. It also expects a growth of 5% to 10% in nderlying diluted EPS (NPAT). The company is focused on the intermediated general insurance market and is working on expanding its network in Australia, New Zealand, Asia, and Europe with broker offices footprint of 1,887.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Despite the outspread of the COVID-19 pandemic, the company did not face any material disruption and showed resilience. Over the span of 4 years from FY16 to FY20, the company reported a CAGR of 14.03% in revenue and a CAGR of 17.21% in gross profit, reflecting prudent management and the evolution of the company and the decent platform creation for growth. As per ASX, the stock of SDF gave a return of 17.08% in the past six months. On a technical analysis front, the stock price of SDF has a support level of ~$3.136 and a resistance level of ~$3.545. We have valued the stock using the EV/Sales multiple based illustrative relative valuation and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered IOOF Holdings Ltd (ASX: IFL), NIB Holdings Ltd (ASX: NHF), Insurance Australia Group Ltd (ASX: IAG), etc. as peers. Considering the decent returns in the past six months, resilient performance despite the COVID-19 pandemic, positive guidance for FY21 and healthy fundamentals, we recommend a ‘Buy’ rating on the stock at the current market price of $3.280, down by 0.304% on 28 September 2020.

SDF Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

Kalkine New Zealand Limited is authorised to provide class advice only. The information on this site does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.